InvestmentsNov 24 2014

News Analysis: Crude’s winners and losers

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The 30 per cent slump in the price of Brent crude oil to just more than $78 (£50) per barrel last week has dramatic implications for both oil export-dependent economies and those that are heavy consumers of the commodity.

So what impact do fund managers think lower-priced oil will have on global growth? As commodity prices are effectively a tax on growth, some managers believe the lower the oil price, the stronger the outlook for global growth will be.

Bill McQuaker, Henderson co-head of multi-asset, says a 20 per cent fall in the price of crude oil could potentially increase global GDP by 0.6 per cent annualised over the following two quarters. And Benoit Gervais, manager of the CF Canlife Global Resource fund, estimates the positive impact to GDP in the US as 0.5 per cent.

John Ventre, multi-manager at Old Mutual Global Investors (OMGI), thinks stronger global growth will increase oil demand, ultimately leading to a rise in oil prices. “The long-term implications for growth are limited, unless the oil price is going to be structurally lower for some reason,” he said.

“US shale production is an example of such a structural change, but at these prices many US shale projects are not viable and won’t be explored.”

Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management, believes lower energy prices are positive for global growth, particularly in the developed world, as it will lower inflation and ultimately benefit consumers.

“The US, which relies on cars and buses more than rail, is a big winner,” he explains.

He says UK consumers should feel better off and spend more on food and other items in the run-up to Christmas, although low wage increases and static house prices could dampen the effect.

But he cautions that “the picture is more mixed for those in the developing world who are large energy producers”.

But who will be the winners and losers of falling oil prices? Mr Ventre warns that oil is a cyclical market and that investors should be wary of assuming that lower oil prices are here to stay.

“In the short term, it should be good for companies that consume oil, such as chemicals, manufacturing and airlines, and bad for companies that produce it.”

Sandra Crowl, a member of the Carmignac investment committee, says at a national level energy-importing countries, such as India, Turkey and Japan, are the winners, whereas the losers are energy exporters, such as Russia, Libya, Iran, Algeria and Iraq.

At a company level, she says the winners include users of hydrocarbons and raw materials – petrochemical and refinery companies – and heavy users of energy, such as electricity grid companies.

So is a falling oil price a good thing at this point in the global growth cycle? The fall in the price of oil has helped soften the blow of lower liquidity in the US and allowed monetary policy to be more accommodating.

Ms Crowl believes it has been particularly useful for Japan, which has relied considerably more on oil and gas imports since the cessation of nuclear energy as a power source.

Frances Hudson, global thematic strategist at Standard Life Investments (SLI), says a falling oil price may help slightly, but will not address the underlying economic issues, which are more about the need for structural reform and investment.

So where is the price of oil heading? The International Energy Authority says it has further to fall in the first half of next year and that the world has entered “a new chapter in the history of oil markets”.

But Mr McQuaker thinks oil prices could reach a floor near current levels because of the pressure on oil producers to reduce supply. The Saudi Arabian government budget moves into deficit when oil trades below $85 per barrel and the high-cost US shale oil producers are less economically viable once oil falls to $80.

OMGI prefers not to forecast the oil price, but has been topping up its commodity allocations on the recent weakness. Rathbones expects the price to be very volatile in the short term and driven by whether the Organisation of the Petroleum Exporting Countries (Opec) is prepared to rein in production.

Mr Chillingworth says: “You need to bottom fish in the oil sector as marginal producers shut down production. This is not happening aggressively yet, but it will in the next six months if prices fall below $70 per barrel.”

Ms Crowl believes prices could continue to fall and reach a floor in 2015, but she is uncertain as to how quickly prices will rise again.

So will volatility in oil prices prompt fund managers to engage in oil plays? Ms Crowl sees investment opportunities in conventional oil-producing companies that have low operational costs and that can remain profitable even at the current low prices.

“Some Canadian integrated and heavy oil sand companies have been overlooked during the US shale frenzy,” she suggests.

“These are solid, low-decline, reasonably low-cost, long-life assets in a stable country and are not expensive right now. They will also eventually benefit from the possible US approval of the Keystone XL pipeline.”

Ms Hudson says SLI’s portfolio positions tend to have much longer time horizons, typically two to three years.

In the near term, she says much will depend on whether Opec cuts production at its November 27 meeting, but uncertainty about potential supply disruptions in the Middle East will make it more likely that the production status quo will be maintained for now.

The IEA expects the price of crude oil to fall further next year and it believes the world has entered “a new chapter in the history of oil markets”